Estate Planning Pitfalls – Death Bed Planning

The Fifth Circuit recently affirmed the district court’s decision in U.S. v. Finely Hilliard, et al. to impose interest and taxes on donees of shares that were deemed sold at less than fair market value to the company owned by relatives of the donor. The gift recipients bore a significant loss because the decision resulted in the donees owing $35 million in gift tax, plus close to $75 million in unpaid interest, which when combined exceeded the total value of the gift.

The donor is primarily liable for payment of gift tax; however, when the donor fails to pay, the government has the right to sue the donee under the theory that the transferee received the asset and the tax follows the asset if not paid by the donor.

In 1995, J. Howard Marshall II sold his stock in Marshall Petroleum, Inc. back to the company at a price the government argued was significantly below market value, resulting in the transfer of wealth to the remaining shareholders, who were all relatives.

The issue on appeal was whether interest was due on the unpaid gift tax going back to 1995. The court ruled “yes,” even though the interest due exceeded the amount gifted. Furthermore, the court held that the government could collect unpaid tax and interest against the donees. The dissenting opinion, written by Circuit Judge Priscilla R. Owen, suggests that the donee’s responsibility is limited (at most) to the amount received in gift as affirmed by the Third Circuit. A possible conflict between the circuit courts could give rise to a review by the Supreme Court.